Crapo, Johnson on Housing Finance Reform Legislation CBO Score

Washington, DC - Last week, the Congressional Budget Office (CBO) released a score for S. 1217, the Housing Finance Reform and Taxpayer Protection Act of 2013, which estimates a cost savings to the government of $60 billion over a ten-year period. This legislation, drafted by Chairman Johnson and Ranking Member Crapo to stabilize the housing finance market and strengthen the economy, passed the Senate Banking Committee in May.

"After the housing crisis we experienced, it is clear that our housing finance system needs to be reformed," said Chairman Johnson. "The significant savings expected by the score from CBO reaffirms that S. 1217 is designed to protect the American taxpayer and restore faith in the American dream of homeownership."

The legislation approved by the Committee in May builds on S. 1217 as introduced, a bill put forward by Senators Corker, Warner and a bipartisan group of eight other Committee members, and it incorporates many ideas generated by an in-depth series of hearings and briefings hosted by the Committee last fall and winter.

The legislation winds down and eliminates Fannie Mae and Freddie Mac (GSEs) and allows for a diverse set of private entities to step in and replace most of the functions of the government sponsored enterprises. The new system will be regulated by the modernized and streamlined Federal Mortgage Insurance Corporation (FMIC), modeled in part after the FDIC. It also creates a reinsurance fund, known as the Mortgage Insurance Fund, to protect taxpayers.

The new system establishes a type of mortgage-backed security with an explicit government backstop and 10% first loss private secondary-market capital to absorb losses and protect taxpayers from future bailouts.

Small lenders will have multiple access points to the secondary mortgage market, including the option to sell their individual loans through a new small lender mutual. The mutual will be jointly owned by small lenders, providing community banks, credit unions, and other small lenders direct access to the secondary market so that they will not be at the mercy of their larger competitors when Fannie Mae and Freddie Mac are dissolved. Lastly, the new system provides certainty to investors and homeowners through standardization and improved market liquidity.

According to the CBO report, FMIC would charge fees on the underlying mortgages to guarantee the payment of principal and interest to investors in eligible Mortgage Backed Securities and would require private capital to absorb some losses before federal payments would occur. Because of this, CBO expects that the government would take on less risk under FMIC guarantees than it would from continued operation of the GSEs under current law and thereby incur smaller costs, and also estimates that enacting S.1217 would reduce direct spending by $60 billion over the 2015-2024 period.